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Private equity in the GCC: 2016 was a watershed year, we expect more activity in 2017

Dubai

Dubai

Dubai

Hogan Lovells Middle East team launched its report, Investment Outlook 2017: Deal trends in the GCC on 18 January 2017. The report explores the commercial, political and regulatory drivers likely to affect transactions and deal flow in the next 12-18 months.

For private equity (as for M&A more generally) the overall feeling has to be one of cautious optimism for the region. Despite continued low oil prices and uncertainty caused by recent geopolitical events such as Brexit and the U.S. presidential election, there is still likely to be plenty of opportunistic growth in the short term.

Activity in the region has been consistent with other parts of the globe – a bumper 2015 offering up a glimmer of hope that global recovery was truly setting in, following by a flat and disappointing 2016. A geo-political nudge perhaps rather than an economic trend? There was much to take notice of during 2016 and to divert attention from proactive deal doing which, within the GCC, was at its lowest level in almost a decade.

So, where are those reasons to be cheerful? Whilst overall growth in the GCC deal arena is expected to be flat despite a modest rise in oil prices, we expect that uncertainty and structural reforms will create pockets of opportunity.

For private equity it is anticipated that valuations will become more realistic encouraging investment firms to deploy cash reserves. Consolidation in certain sectors (e.g. banking) is likely to continue and early stage start-ups will attract international investment interest in the region.

Although private equity deal flow within the GCC was relatively weak during 2016, it was a watershed year as demand and supply started converging, boding well for more activity in 2017. One Middle Eastern deal did buck the overall trend for 2016. The US$2.4bn purchase of a majority stake in Kuwaiti food company Americana by investment vehicle Adeptio was one of the region's largest ever private sector transactions. Prior to the deal, Saudi Arabian sovereign wealth fund, the Public Investment Fund (PIF), took a 50% stake in Adeptio alongside Dubai based businessman Mohamed Alabbar.

There are other drivers, too. Institutional investors are becoming more interested in locked-up investments because of the lack of good returns on more liquid investments, which are also quite volatile. New legislation, removing obstacles to investment, will also play a part. In the UAE, the new insolvency law came into force and provides clear guidelines and structures for commercial bankruptcy. The passing of this law bodes well for the introduction of the long delayed UAE foreign investment law, which would allow 100% ownership in key sectors.

Local private equity firms, such as Abraaj, as well as entrepreneurs, like Mr Alabbar and Fadi Ghandour, have started investing in tech start-ups and are not only attracting support from government entities such as the PIF but also piquing interest from outside investors. As a result there has been a gentle foray into earlier-stage and venture capital type deals filling the gap left by a limited and small pool of domestic venture capital funds, many of whom are reaching the end of their life cycles.

Investors are becoming more comfortable with the new oil price environment and governments are taking action to rebalance their finances, creating new pockets of opportunity for the private sector and shifting the potential for future deal flow.

The next phase of growth will not come from government spending as in the past. We will see moves towards the long-term development of private equity and foreign direct investment, and that is the biggest reason for hope.